2008 Trends: Subprime And Auction-Rate Cases Continue To Drive Filings, And Large Settlements Keep Averages High
Article by Stephanie Plancich, Ph.D. and Svetlana Starykh
with former NERA Consultant Brian Saxton1
Originally published July 2008
Please click on the following link to view
2008 Trends: Subprime And Auction-Rate Cases Continue To Drive
Filings, And Large Settlements Keep Averages High in its
entirety, inclusive of all charts, footnotes and glossary of
terms.
If activity continues at this pace, there will be
almost 280 filings in 2008, the highest level since
2002.
Introduction
After a decrease in 2006, filings began to increase in 2007.
This trend has continued into 2008: currently, filings are on
pace to reach almost 280 for the year, a level not attained
since 2002.
What's driven the increase in filings? Clearly, the
current subprime and credit crisis is a major factor in the
recent surge in shareholder class action filings. In 2008, 51%
of filings through June 30 have allegations related to the
subprime collapse.
To test another potential driver of filings, NERA analyzed
the impact of market volatility on longer-term patterns of
class action filings. We find that high market volatility is
positively correlated with the number of filings: if market
volatility is higher during a quarter, controlling for market
returns, filings are likely to be higher in that same
quarter.
We have also examined the likelihood of a company facing a
class action filing following a large drop in the company's
stock price during the period from 2005 through 2007, as
measured by a net-of-market one-day price decline of 20% or
more.2 We find that the probability of a filing over
the three months following such price drops increases with the
size of the drop.
Even as filings were increasing in 2007 and 2008, average
settlement values remained around $30 million. Removing
settlements over $1 billion from the calculation, the 2008
average settlement actually fell to $10 million, well below the
level of recent prior years, and much closer to the 2008 median
of $6 million.
Although it is too early to know whether recently filed
cases will result in big settlements, there is reason to expect
that they will. Investor losses—a powerful determinant of
settlement size—for cases filed in the first six months
of 2008 have a median value in excess of $800 million,
substantially higher than the approximately $350 million median
for cases settled in the 2005-2007 time frame. The sharply
higher investor losses of recent cases are largely a subprime
phenomenon: median investor losses so far this year are more
than 10 times as large in subprime cases as in non-subprime
cases.
Filings
Recent Trends
After dipping sharply to a more than 10-year low of 131
filings in 2006, federal shareholder class action filings began
to increase in 2007. By year-end, there were a total of 195
filings, surpassing the 2005 level. Through June 30, there have
already been 139 filings in 2008. If activity continues at this
pace, there will be almost 280 filings in 2008, the highest
level since 2002.
Six-month data reveals more about the timing of the collapse
and subsequent upsurge in filings. Filings fell precipitously
in the second half of 2005, but this drop is masked in the
annual data by the relatively high filings in the first half of
that year.
Filings grew most strongly in the second half of 2007. This
increase coincided with the first subprime-related filings:
there were only nine subprime filings in the first half of
2007, but more than three times as many in the second
half.3 The first half of 2008 brought another 49
subprimerelated shareholder class action filings, plus 22 other
cases related to auction-rate securities market
failures.4 Although the majority of options
backdating cases were filed in 2006, a handful of these
contributed to the 2007 and 2008 upswing.
Figure 1. Federal Filings
January 1, 1996 - June 30, 2008
Figure 2. Federal Filings: Six-Month Intervals
January 1, 2002 - June 30, 2008
Figure 3. Federal Filings by Circuit, Year, and Type
of Case
January 1, 2006 - June 30, 2008
Figure 4. Federal Subprime and Auction-Rate
Securities Filings by Circuit
January 1, 2007 - June 30, 2008
Notably, subprime and auction-rate securities cases alone
cannot explain the increase in filings. Since June 2007,
standard filings—which exclude auction-rate securities,
subprime-related, and options backdating cases—have
exceeded the levels of 2006 and the first half of 2007.
Historically, securities class action filings have been
concentrated in the Second Circuit (including Connecticut, New
York, and Vermont) and the Ninth Circuit (which includes
California and certain other Western states and territories).
This remains the case in 2008. Year-to-date, the Second Circuit
has seen more than twice as many filings as the Ninth, due in
large part to subprime and auctionrate cases; the financial
institutions that these cases target are concentrated in New
York. For standard filings, on the other hand, the Second
Circuit is ahead of the Ninth by only 30%.
The concentration of issuers in the Second Circuit is
particularly great in auction-rate securities cases, which
first appeared in 2008. While seven of these cases are to be
found among the Seventh, the Eighth, the Ninth, and the 11th
Circuits, the other 15 are all in the Second.
While subprime and credit crisis-related filings are
primarily a Second and Ninth Circuit phenomenon, all Circuits
have had at least one such case. In 2007, seven subprime
filings were filed in the 11th Circuit—which includes
Florida, a state associated with some of the earliest
subprime-related disclosures—but the 11th Circuit has had
...
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